Let’s Call For a Strike at the NFO Factory Dec 16, 2015

If insurance companies sell you dreams with a pledge of accompanying you even after your death; mutual funds sell you stories. Whatever you do; no matter how hard you try to convince them for being fair and ethical; some manufacturers of financial products remain as crooked as dog’s hind leg.

The Securities and Exchange Board of India (SEBI) has warned mutual fund houses from time to time to merge similar schemes. It has discouraged industry players from launching New Fund Offers (NFOs) with features that resemble the existing ones. But as they say, “old habits die hard.”

If there was an award given for launching the maximum number of NFOs in the minimum period of time, there will be a close contest among 3-4 mutual fund houses. Tata Mutual Fund, ICICI Mutual Fund, Reliance Mutual Fund, and Sundaram Mutual Fund have launched 4-5 equity oriented funds each from April 01, 2015 till date.

If you rank all Tata Flagship companies in a descending order, Tata Mutual Fund may find a place at the bottom on ethical practices.

In all, Tata mutual fund has 15 equity oriented schemes at present, of which 8 are diversified in nature, 3 are Equity Linked Savings Schemes (ELSS) , and 4 are thematic funds. Still the fund house believes its product portfolio is inadequate to service investors and take exposure to all sectors and marketcap segments of Indian markets. The other possibility is that the fund house believes, investors are fools and they can be fooled repeatedly by selling them stories.

Story writing is a tough task, believe us readers; but it seems no one can beat Tata Mutual Fund in this contest. It writes excellent macro-economic stories and nothing can be taken away from its advertisement and marketing teams. The only thing is they have sold these stories many times in the past. Why do you think it has two Infrastructure Funds otherwise? Let’s find out what’s new this time.

The name of the story is:

Own a piece of India

No, Tata mutual fund hasn’t sold its mutual fund business to enter into a real estate venture. However, for the sake of the story; any story that reads well, touches your heart and takes you closer to their products, is a good story. Read further guys, (Danger: don’t try to copy the story anywhere as it has been copyrighted)

As described by the Tata Mutual Fund, “Own a Piece of India is a new campaign by Tata Mutual Fund which is designed to offer investors a one-stop solution to participate in India's economic growth. We are launching five ‘New’ funds and also offering an existing fund under this campaign.”

What are the funds offered under one umbrella?

Under the new umbrella of “own a piece of India”, Tata Mutual Fund is launching 5 new funds:

Tata Banking and Financial Services Fund

Tata India Consumer Fund

Tata Digital India Fund,

Tata India Pharma & Healthcare Fund

Tata Resources & Energy Fund

The existing fund that comes under the theme is Tata Infrastructure Fund. The NFOs is open from December 4, 2015 and will close on December 18th.

Where will the fund house invest?

Tata Banking and Financial Services Fund

Tata Banking and Financial Services Fund is an open-ended Banking & Financial Services Sector Scheme. The investment objective of the scheme is to seek long term capital appreciation by investing approximately 80% of its net assets in equity/equity related instruments of the companies in the Banking and Financial Services sector in India. The Lead Fund Manager is Pradeep Gokhale and the Co-Fund Managers are Atul Bhole & Rupesh Patel.

Tata Digital India Fund

Tata Digital India Fund is an open-ended Information Technology Sector Scheme. The investment objective of the scheme is to seek long term capital appreciation by investing approximately 80% of its net assets in equity/equity related instruments of the companies in Information Technology Sector in India. The Lead Fund Manager is Pradeep Gokhale and the Co-Fund Managers are Atul Bhole & Rupesh Patel.

Tata India Consumer Fund

Tata India Consumer Fund is an Open-ended Consumption Oriented Sectors Scheme. The investment objective of the scheme is to seek long term capital appreciation by investing approximately 80% of its net assets in equity/equity related instruments of the companies in the Consumption Oriented sectors in India. The Lead Fund Manager is Atul Bhole and the Co-Fund Managers are Pradeep Gokhale & Rupesh Patel.

Tata India Pharma & Healthcare Fund

Tata India Pharma & Healthcare Fund is an open-ended Pharma and Healthcare Services Sector Scheme. The investment objective of the scheme is to seek long term capital appreciation by investing approximately 80% of its net assets in equity/equity related instruments of the companies in the pharma and healthcare sectors in India. The Lead Fund Manager is Rupesh Patel and the Co-Fund Managers are Pradeep Gokhale & Atul Bhole.

Tata Resources & Energy Fund

Tata Resources & Energy Fund is an open-ended Resources and Energy Sectors Scheme. The investment objective of the scheme is to seek long term capital appreciation by investing approximately 80% of its net assets in equity/equity related instruments of the companies in the Resources and Energy sectors in India. The Lead Fund Manager is Rupesh Patel and the Co-Fund Managers are Pradeep Gokhale & Atul Bhole.

Tata Infrastructure Fund

Tata Infrastructure Fund is an open-ended equity scheme. The investment objective of the scheme is to provide income distribution and/or medium to long term capital gains by investing predominantly in equity / equity related instruments of the companies in the infrastructure sector. Fund Manager - Rupesh Patel.

The exit load for the funds will be 1% upto 90 days, except Tata Infrastructure Fund where exit load is 1% upto 365 days. The maximum permissible expense ratio for all the funds is 2.50%.

Readers, the reason why PersonalFN highlighted the load structure is to attract your attention to one salient yet silent factor. The exit load of sector funds is 1% upto 90 days. In other words, the fund house is encouraging investors to churn their portfolios.

PersonalFN failed to understand what stops Tata Mutual Fund from buying promising Information Technology stocks in Tata Equity Opportunities Fund and Tata Pure Equity Fund. A separate offering looks needless for taking exposure to them. The same holds true for other sector funds offered under the umbrella. The timing of the launch couldn’t have been worst. No pick up in corporate earnings and overvalued markets will test the skills of fund managers.

Read this justification from Tata Mutual Fund

“In a diversified equity fund, the sector allocation is decided by the fund manager but with benchmark awareness. Based on investment strategy and mandate, the fund managers decide to take overweight or underweight exposure to a particular sector. Through this offering, we are enabling investor and advisors to customize their sector allocation by allocating different amount in different funds.”

The reason why PersonalFN labels this explanation contrived:

First, it violates the basic purpose of investing in mutual funds. Investors invest in mutual funds because they have no time or expertise or both to take prudent investment decisions. Therefore, they seek help of professional fund managers. Diversification to off set risk is the key consideration for them.

People who have knowledge and expertise to decide which sector will reward them more; will not come to mutual funds. Investing directly in equities would be the right option for such savvy investors. Involving advisors in a decision about attractiveness of a sector would serve as an open invitation for advisors to swindle investors. To earn hefty commissions, they can make you switch from one sector fund to another claiming that the latter looks more attractive. Investors can’t have any defence against it. You can’t blame Tata Mutal Fund either; they clarified right at the beginning that it wants to empower investors to customize their sector allocation.

Another downside to the umbrella offerings is, it will always keep investors guessing as to where the markets are headed. PersonalFN advocates that investors should only focus on their long-term financial goals. Predicting markets and churning portfolio may prove to be a futile exercise. And if you are novice investor, betting on or against the market could be disastrous for you.

Merely having an “Ethical Fund” under one’s product offering doesn’t make a fund house ethical. The fund house has to demonstrate its adherence to ethics through its actions. PersonalFN believes (in)action would be the best response to the NFOs launched by Tata Mutual Fund recently.

PersonalFN has launched a movement against unethical manufacturers of financial products and intermediaries. Hope we see people get wise and see the change for good.

Let’s work towards bringing ethical and professional standards in the financial services industry. So share your stories with PersonalFN. We would be happy to hear your views and experiences.

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